Dicks Sporting Goods: A Forgotten Christmas Trade

Instead of looking for the best 'value' whose P/E looks great right up until the time the "E" gets halved, hunt for a superior and niche franchise.

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Never missing a chance to teach my kids about uncrowded trades, I suggested that their first idea of what to leave Santa – chocolate chip cookies – was great, and likely a very popular one. But, what if we did something different I wondered aloud. "How many of your friends baked an entire cake for the big man?" I asked. Seeing them raise their eyebrows, I knew I may have sparked a few synapses that may one day have them barking at me on my trading desk, "Stop thinking so conventionally old man!"

But for a few more decades I can stay one step ahead, like my selfish designs on the remaining 11/12ths of that carrot cake. So we did, and they even had the idea of leaving a few raw carrots for the reindeer, "Because not many people do that dad." Ahhh…a Christmas Eve Contrarian was born – my favorite gift.

Santa's Workshop, Online

In trying to construct Big Jack's Deere (DE) Gator (a battery fired truck he can drive right through my flower beds in a few months), my abject failure forced me to call in the bullpen after effectively loading the bases with two walks and a hit batsman without so much as a single strike. In trotted the Mariano Rivera of fix-it guys, my father in-law. Taiwanese factories have his mug shot as one of the ten-most-wanted to confuse an extra or misshapen part. - Never been done.

He usually tries to make me feel useful by assigning me little jobs like being in charge organizing the twisties or petting the dogs to keep them out of the way. Borrowing my wife's pink robe and making lemon squares with her mother would have been less emasculating, yet we've both grown strangely comfortable in our roles. After spending two pride-swallowing hours in the cold, we finished, only to find a crack where the wheel was attached.

He never flinched, I actually whimpered.

Like a punch in the gut, I felt depressed for the first time in my life. I think he was secretly OK since he'd soon get to build another Gator. I considered buying a real tractor instead, because it would arrive built.

I share the story for two reasons. At Assemblers Anonymous we believe it's healthy to reach out to other twisty straighteners so you know you're not alone. And second to point out one of the many reasons things are "pretty good" at Costco (COST) - as the company recently stated. We had to take this rig back to "Santa's workshop disguised as a store to confuse the Grinch" as we explained to the Mini-Minyans and dealing with folks at Costco could not have been more different than any other retailer – a true pleasure. And this year marked a significant first: Santa never even left his chair and ordered straight from Costco online, perhaps also explaining the stubborn strength in MasterCard (MA).

The 2 Minute Install

The highlight of the big day was watching my three-year old show me how to attach the nunchuck to the remote for the new Wii after his mom unwrapped and installed the whole console in less than two minutes. The highlight for the Special K was watching me fall down as I zipped a cross court winner against my daughter. We had to stop when she actually thought she went into labor from belly laughs.

Like Cosmo K at karate classes with children, when asked how I was doing an hour later, the answer was simple: "I'm dominating." Not all smiles though, there were tears when Jack took a vicious back swing to the head from his bowling sister. Later, both of them ratted me out telling their mom, "He won't let us have a turn."

I have written about Activison (ATVI) all year and my friend Jeff Macke has done an even better job predicting this industry's startling success. We have both felt the game-makers were not at all prepared for the Wii demand, which is good considering how much higher profit margins can be to make its games compared to other platforms. I'm fascinated to see what Nintendo (NTDOY) does next with a growing installed base - literally in the palm of its hand.

What Nintendo has created for all ages is unlike anything I've ever seen. But perhaps what stuck out most to me - only slightly more than the ferocity of my son's jabs while boxing - was the fact that I was not only willing to pay a premium to get the Wii, but that I never left my chair to do it by ordering from a third party via Amazon (AMZN). While Amazon's success is still baffling to many who view it as a perfect short, it was a perfect score for me, and judging by their sales many others as well.

Minyan Mailbag

Ryan,

Love your stuff. You piqued my interest with your article last week on discretionary spending. I went into the new Tiffany (TIF) store here in Red Bank, NJ on Saturday night to pick up a last minute gift for my soon-to-be 17-year-old daughter. I embarrassed my wife with my 10 minute interrogation of the lovely sales staff there trying incessantly to get them to say something negative about holiday sales. Were sales down? Are people opting for cheaper items?, etc. I wanted anything to back up the thesis that people are not spending on luxury items. They were very nice to answer my questions and also very positive about how holidays have been going.

Another instance. I, like you am going to be long a new vehicle for my wife in the very near future. I had a difficult time reaching the BMW salesman on the phone Saturday because he was so busy with sales. I was astonished and amazed at these recent examples that may bode well for your trade. Keep up the great work! I hope you and your family had a Merry Christmas!

Minyan Len

Len,

It was indeed, and thanks for the kind words and great notes that will no doubt cause many to write off your situation as an exception, not an example. I would not argue, but isn't that the whole point here? I'm looking for exceptions to trade or invest in, not clear to see examples of what is not working. To add some color to that "Uncomfortable..." article you mentioned, where I shared that I believe some long-side opportunities have emerged in the consumer discretionary sector despite the fact that I couldn't be less interested in 95% of the group.

Below you'll see the "envelopes" as I like to call them around the sector's 50-day moving average with the red and green areas marking two standard deviations, courtesy of my friends at Bespoke Research. You can see what often happens, even in a secular downtrend for the group, when we reach oversold levels. Click to enlarge image

Instead of looking for the best 'value' whose P/E looks great right up until the time the "E" gets halved, I'd rather hunt for a superior and niche franchise that may be sitting on support inside of an uptrend instead. Dicks Sporting Goods (DKS) has posted +43% earnings growth over the past 4 quarters, versus the sector's decline of (9%). DKS surprised the Street with a big upside earnings' surprise last quarter versus an average of a (13%) miss for the sector. DKS' Return on Equity is 22% versus the sector's 11%. Yet DKS shares trade in line with the sector on a valuation basis using either earnings or revenues.

Unfair to compare it to many in that group? Yes, and that's the sort of mismatch I'd be looking for, especially if you can be patient and wait for pullbacks where above average fundamental stories actually fall below average in performance.

Since Labor Day, the pullback in DKS was actually larger than the sector's, perhaps setting up an interesting mismatch of reward over risk, especially if you want to use stops below your own version of a support line.Click to enlarge image

Most importantly DKS is expanding, with a total market cap of $3 billion versus over $30 billion for the sector. The firm is planning to open its first store in Houston and I will gladly stand in line. The only sporting goods store (remarkably, especially considering the sports culture down here) nearby could not try harder to lose my business. The week before Christmas was an interesting time to be short staffed at the cash register where I stood for almost 10 minutes. No big deal you say? I was second in line!

Regardless of the economic weather out there, there are companies that can create their own climate. Looking at those doing so in the most beaten up sector (after Financials) seemed like almost as good an idea as those carrots.

"What are we going to do next year, Dad?" my little girl asked. "Something different," I replied, just like I'd expect from the Stock Market.

Happiest of New Years Minyans, I wish you nothing but health and happiness. It has been my true privilege every day to share the journey with you.

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